Surveillance: Fed Pause with Hyman

joins us today. He is vice chairman at evercoreps ISSI were thrilled that he will have an extended conversation with us, and yes, we'll get to the China call here in a bit. Edheiman, thank you so much for your generous time this morning. You say inflation is slowing significantly. David Rosenberg you knew him at Mary Lynch says inflation is slowing significantly. It's on the good side. Do you see service sector inflation slowing? Yes? I do. So. There's a

Thomas It's great to be on your program. It's it's a trip program released in John. I tell you guys, it's just wonderful. But there's a PMI for services and it's dropped twenty points from seventy five to fifty five. And there are plenty of services that I think are slowing, particularly the financial services area, insurance, etc. But that's the key, is to get the measure that PAL watches to slow down.

One of the big services is rents, and I'm convinced they're going to slow dramatically and maybe even go negative. For the shelter CPI. There are half a dozen measures of rents, surveys of rents, and they've all slowed significantly, if not declined, over the past nine months, and they leave the shelter CPI by about eight months. So I'm a couple of months late now on this showing up, but I think the shelter is gonna slow. And then

before if you ask it, wagers are gonna slow. If if Mackenzie is laying off people, what can you say, Well, can we make news here today as ever core SI laying off people, I mean you know they may lay off me. If inflation does this slowly, that's uh, well, we've heard this in C. J. Lawrence and Julian Emmanuel be very careful here with a tough guy and Iyman and I want to cut to the chase, which is the heritage is what you've done since C. J. Lawrence. I mean it goes back to Wayne Angel. It's about

monitoring M two. Is you know M two is in disrepute. Let's say over the last decade, why are you following M two and it's collapse so carefully in your research? Note So, I've met Milton Friedman when I was twenty three years old, and in the seventies he was became a rock star, and every time you had about of inflation money growth accelerated ten to fifteen percent, and so

it was an easy connection in that regard. Then getting to today, bank deposits, which are eighty five percent of the mice supply, are a practical way to track it every week, and they have declined significantly. They're down about two percent now and they've declined one hundred billion in the past two weeks. This is going back to the nineteen thirties to have a situation like this. Now, we found over a decade that the mice supply might not have much of an impact if it's in a normal range,

say five to ten percent. I think Margaret Thatcher found that out when she was trying to gear Monterrey Paul, I'll see with Freeman off of swings and the money supply. But last year the money supply increased almost thirty percent. The year before that, government outlays increased fifty percent, and the Fed monetized it. And now MP two last week was minus three percent, which is a ominous or significant climb,

and it leads by one and two years. So you can't see it on the program you have this this morning, but it's it's coming, and I think it shows up in some of the slowdown of inflation readings we're seeing now, like container freight rates, well, natural game. This really speaks

to long and variable lags. Ed this discussion around the tightening and the removal of accommodation and how long it's going to take before we start seeing it the data, and as you say, you and many others have been surprised that we are not seeing it more and that you're even seeing a re excel leration in certain inflationary reads in specific segments of the economy. What does long and variable lags look like in twenty twenty three, in an era of so many cross currents of different trends

one in two years, That's that was the standard. We do a lot of standard for Milton Friedman, We've done a lot of econometric work on global short rates. They lead by one in two years, and if you'll hang on for a second. In nineteen twenty three, nineteen twenty three, John Maynard Kane sort of paper that said the mine

supply leads by sixteen months. So I've not been I've been surprised, but i haven't been fighting the idea of the economy is strong now because a year ago FED funds were zero zero, QWE was in place, and the mince supply was around Yeah, you know, those are all out totally different, and so that will show up more towards the end of this year and on end of twenty twenty four. I think until we see the long

and variable lags actually play out. People are talking about a no landing scenario that we possibly could avoid any kind of recession or downturn or even a significant slowdown and end up reaccelerating into a new bull market. Do you push back against that and say, look, in a year, two years, we're going to see some sort of downturn. And the longer that you have faith in this no landing scenario, the more potentially fraught. It could be on

the no landing card. I mentioned long and variable lags, and they're pretty painful. Reinhart Rogue a piece in early two thousand and nine criticizing people that had moved to the view that we would have no recession, that the housing weakness would be contained and it's different time became very popular, and that's what's going to happen. That's what's

happening now and will continue to happen. But I think, judging by it, will end up creating a re section for the end of this year or into twenty four. But it's going to be pretty painful. And the no landing story, I think he's looking at things right now, right now doing great well, you know with that hymen folks, and we welcome all of you on radio and television

generous to be with us for this half hour. I do want to point out that there's a full econometric display in his research note, including in our square to sixty eight percent on what short rates are going to be doing. But to get out front, folks, we protect the copyright of all of our guests. Go to evercres Is side to get the ed Hyman Jack Rippi and the rest of them. Religion if you will, and Hyman, I want you to speak to those younger. They didn't

read you at C. J. Lawrence. They barely know your research note over core Issi. They've never faced this rate structure, this return to a real rate. There's a whole feeling life can't go on. Explain how life goes on if we come back to a legitimate interest rate regime. It seems to me, Tom that we're already getting into an environment where life goes on because the economy is doing

so well right now. I know their lags involved, but the stock market, you know, is pretty contemporaneous, and they know that rates are high, and so I think we're getting there. But it's a learning process. The FIT, I think, is doing a pretty good job of communicating what their plans are. If I was them, I would pause and see what they've gotten done so far, and then is that they need to keep going They can. It turns out they should continue to pause or cut race, and

they can do through that. I would pause, given how much water's under the bridge, and iiman as we speak to you, it is images of the President of the United States meeting with a Bucharest nine. Of course, this historic moment for Eastern Europe after the President's trip to Ukraine him and I say this with immense respect, and you remember the politics that we've all faced. How do you overlay the politics of the nation into what has

been a multiple decade Himan optimism. How do you take the challenges of the time of Jimmy Carter, fold them over to the time of Joe Biden and overlay them on a belief in the American economy. That's too much for this morning, But you know, I have a deep respect for democracy, and I'm a conservative, but I see a benefit in the back and forth that we have

going on right now. I think it's too extreme, but it plays a role in our system, and so at the moment, I don't see it being a terrible impediment. Pal is doing what he's doing. I don't know if you have seen it, but the federal outlays are scheduled to decline about five percent this year in twenty twenty three. Now that's they went up twenty twenty nine. Does not celebrate too too much, but it is a crazy world. The parts that I find most troubling and I'm sure

you do too. Is the war situation and also the situation in China, which I'm constructive on, but they definitely they have a more problematic situation politically than we do. Did you stop traffic here the last time you're on with an optimism on the China reopening, I believe you'd have adjusted real GDP. Where's your number right now on a China reopening? Is it still near six percent? We have six at the end of the end of the year.

It's a complicated situation, actually a little more complicated than I expected, but we still think it's going to be very strong. They're opening up, and I've learned either the hardware the easy way. That makes a very big difference. When we had the pandemic collapse and China did. I learned from China because their GDP was minus fifty and so I was estimating minus fifty for the US, which

wasn't too far off. And then we had a big rebound and GDP was something like thirty and that same China and in the US, and so they have that dynamic coming on now they reopened and it seems to be pretty successful. They've gotten through the pandemic and a very big percentage of people, very big percentage of people have had the virus, and so that they have a

current immunity going on. Plus stimulus YEA working through the system. Well, how much will that actually trickle into the rest of the global economy given the increasing isolation of China, both deliberately for a more focus on nationalism versus also an isolation with respect to the fissures that we hear right now with China in Russia, Lisa, I think they'll I think they'll export, you know, once they get the factories going.

I think they'll be an increased source of exports. Just recently they became the biggest exporter of vehicles, and so I think they'll do that. And I think they're going to push up commodity prices like copper, but then come

in and push down finished good prices. I will say that I'm watching most closely the price of oil and that is my north star as to how China is progressing right now, and all prices which I look at Bloomberg frankly, all of the dime they're pretty quiet right now, around seventy five dollars for West Texas, and so that tells me that China hasn't gotten ripping ahead yet. I

think that's coming. All prices will go up. This is incredibly important because a lot of people have come on this program at and said that the oil is incredibly muddied in terms of the price signal, given the fact that people are changing to renewables, given the fact that China has increased domestic production of wind of soul, of even using coal, or exporting or importing some of the

materials from Australia. Are you saying that that's not true that oil is the cleanest read on what's happening with China. I think that's a fair point. I think it's an excellent point. And on the price of oil, it's just to pick one commodity price. If things like what you're mentioning are true for a number of commodity prices, it could feed into my wrong view that inflation is going

to be less than what people expect. Not to mention the fact that the money supply is contracted, but I think some of these technological advances that you mentioned, could you know, put dour pressure on some commodities. Now a money like copper is right in the middle of the technology advances. You need to copper wires to make the technologies work. But some other commodities, I mean watching natural gas and you can see making new lows, both in Europe and in the US, and you can see when

that happens. It really helps economic activity on a current basis, right, particularly Europe. But I think it's also working a little bit here. I mean, I understand that you know, once a week, maybe once a quarter, you read Julian Emmanuel's work at evercore is SI. But let's dovetail the stock market, the equity market, and ownership of American equities into your economics.

With all of this said, are we at a point of nineteen seventy five or maybe the great bull market of nineteen eighty two, where corporations like they did then, will adapt and adjust and prosper well. First, we have an open office architecture. I learned this from Michael Bloomberg. This is when you were on Park Avenue, and so we have. And so I am cursed with the fact that Julian sits right next to me, So I have to put one up with the guy all the time.

But he is he is terrific and thinks the world of all three of you. But on the current picture, my view is that inflation is the key. The FED is going to keep tightening until either the economy slows or inflation slows significantly. And I think the inflation is slowing more than the FED things. And a year ago, if I may say, I was pretty agitated that transitory was the wrong idea. Inflation was going up everywhere, every place I looked at was going up, and the FED

kept saying transitory and they kept rate to zero. And now I see inflation coming down in most places. Unfortunately, it's not coming down in the most visible places that the FED looks at, like the consumer Price Index or the PC. But as a student of this, I see it coming down in so many places underneath the surface, in the real world, if you will, and I think inflation is going to keep coming down, I think it could undershoot the FIDS target two. Ed Hyman, thank you

so much for this half hour. Generous of you to be with us. Edward Hyman is ever court I side. Let's talk about how stale these FED minutes A So that FED meeting was at the start of February. Since then, when chem and Pou said the disinflationary process has started. We've had payrolls at five hundred and seventeen thousand, unemployment at three point four percent, big jump in the ICEM Service s Index for the month of January. CPI not dropping as quickly as people hoped for. PPI delivering an

upside surprise retail sales with a three hand tool. And then we've got a first look at February with a PMI yesterday improven as well. Jeff you joins us right now of Bmy Melon and Jeff, I guess I'm going to lead with a question I've already answered, just how stared at these minutes they applied sale not just in domestic sense, but in the international sense as well. Look at what's going on globally. Your services m I wrong in the UK, in the Eurozone went forth for Jeremy

Hunt deer chancefer that. So are we going to look at fistal similars in our Europe? And that's one trade side which the US is it's supposed to what'sover in China. So now not just a mestic side. Are strong for the US economy, You're looking at an external lift as well. So going back to the point made earlier, so higher rates the price of the great wi have to be a price. Why isn't it something to sell rate? And Jeff you I look at this in your student of

history and this as well OMG rates. Higher inflation, if not higher, at least inflation or disinflation sustain. And the basic simplistic thought is the world will come to an end as we know it. There will not be revenues, there will not be earnings. Life won't go on, And yet history says the complete opposite. How do we come people down that life will go on? Well, well, I think they're going to need to look at the margins.

They're going to have to look at earnings. So maybe a couple of weeks ago the spot by Dob Losses and the tech sector thists talk about a margin recession a bit more so on the top line. But again let's just look at what under line demanders. Look at the at receipts in the UK and Europe, they are rising.

People are spending on the continent normally where people are savers, they are starting to spend a Seeing that energy bills starting to come down, they saved for very high energy bills in an oil above a hundred, but now it's not come to that, so maybe they can use in their purse springs again. So let's look at earnings upside surprises that will probably calm people down. Jeff. If you take the j unfair of view of the world and you create your ear a head outlook on March thirty first,

how would you reshape it right now? Based on what people were going into the year of feeling that there could be some sort of softness the first half, then a real strength in the back half. Now people have adjusted to real weakness in the first real strength in the first half, and weakness in the second half. Where do you land? So I would still land on no recession, and we were skepticaled that there was going to be a chance of a heavy recession in the first place,

and certainly at a higher level for longer. It's probably not in the camp of Oh, let's think about above six percent or something wild along those lines. Is trend growth in the US or globally higher than where we were fifteen to twenty years ago. Absolutely not. So no gravity will come to play a role at some point, but we have to land in a place where it's real rates or longer and asset allocation we'll have to follow when I'm following right now. Also cash on the sidelines,

money has to be put at work. Where is it going to go? I still don't think it's going to be in the dollar, because most people own that already. Will Jeff, let's put it all together. I said the Barclays. It's said the higher yield, higher rates at a price to pay for better growth. And you said, why is that a price? That's something we should celebrate any you

celebrate it. Well if you have an Europe for example, if you look at pace like Switzerland right, which has struggled with unlow rates for a long time, and we discussed this a couple of months ago, you know, suddenly the financial services industry there will be able to offer yields and to actually keep money on shore as well. So this is going to change the flow dynamic whereby everyone blindly chasing yield, sometimes not of the dubious credit quality.

I might add, you can now look for the better gems out there, stay onshore in particularly savings heavy's economies, and then domestic productivity, because higher yield means there are rather higher returns domestically to generate that as well. So I would see this as a good thing, but as allocation, they need to just go with an you play book.

I'm a simple man. Does that mean by banks? Well, if we look at our high folcus flows financials both in emerging markets and developed markets, financials the most sold sector globally, full stop, right, And that's what's telling me is we have high front end yields, high funding costs, but there's no loan demand out there. That's the missing link, right, go back to Tom Leis to talk about the velocity of money that has not picked up because people are

still scared. But if we see a consumer demand and further analyte industrial demand out there, then banks can start to lend. There will be a margin, but that is where the opportunity is going to be given the amount of setting we've seen. Hey, Jeff, this was fun. As always. It's going to hatch up, Jeff. You there a senior amount strategist over at bmy melon driving forward right now and this is a joy. Emrida send all of these

strategists fools take a different view. And what I love about Amrita send half of maybe Jeff Curry and as microeconomics at Chicago. She really looks at the dynamics of supply and demand. Co founder and head of research in Energy Aspects in London and reader as simple as I can, and I don't need a central theorem lesson, but what's a correlation of your world right now to the stack in bond upset we're living, how does crude correlate? Great question, Tom,

and as always, thank you for having me. Always a pleasure. I mean, look, I think part of the problem is crude oil specific fundamentals are not particularly strong. We've built a ton of infantries, We've had bad weather, we've obviously had we do have right now a lot of refinery maintenance. And that's why right now crude is pretty much at the mercy off exactly like you're saying, the bonds and the equity markets, and this is why the six sessions

we've seen that's been trending lower. And this is something we call for just recently as well, that crude is probably going to be at the mercy off macro headlines and by the way, now even good news is bad news. You would think, oh, strong labor market in the US is actually really bullish for gasoline demand. But guess what, No, now the fears that means effects going to raise interest rates? What does it mean for the future of the US economy.

So it is very, very problematic for crude until fundamentals pick up. Well, when the fundamentals pick up, we do have China reopening. What is your ex excess on the China reopening? Are you waiting for May or are you waiting for May of twenty twenty four. No, I'd say May of this year. We've got a million barrels per day baked into our numbers of Chinese demand growth. I think the problem, of course, is that China again just coming out of the lunar New York holidays, that it

too has maintenance. Look, we are hearing right now of potentially very low Chinese product exports coming out in March. We need to confirm that it's still very early stages. Will be the very first sign that he has domestic demand is strong. It will take a little bit of time for this to percolate through. I would say right now the oil price is actually focusing and factoring in a Western recession, and it really hasn't factored in the

China reopening. Well, how much. Does this really factor in the fact that any kind of China increase in usage will be funneled into some of the renewables, into a lot of domestic production, whether it's wind or solar. This is what we were talking about with at Morris. That kind of substitution for whatever reason, is diminishing the demand

even in a stronger economic profile. Absolutely the case of the longer term right but right now we've got more than a billion people who have been locked up for three years, and we are already seeing it in the jet fuel numbers. Just China's reopening a loan can lead to four hundred thousand barrels per day of additional jet fuel demand. There is no renewables to replace that, right so there is an enormous amount of bent up demand. We've seen this in the West, and I don't want

to complicate the story. The renewable story is absolutely there for the long term. Ev sales in China are skyrocketing. We have that in the numbers, but that doesn't take away from the fact that gasoline and jet which is basically used for mobility, we are already seeing very very strong demand. People are going to fly and you are going to see some very strong demand numbers out of the region. So good news, bad news, it doesn't really matter what it is. But the macro has been an

oil prices lower. That seems to be sort of the trend regardless. What's going to shift that you get prices above a hundred dollars a barrel like you expect, I think it we have to wait really towards kind of second quarter, end of second quarter and into the second half of the year, and for me, the fundamentals really have to tighten up. The stocks we've built will need to be drawn down, which we are expecting counter seasonally from the second quarter of this year, not before that,

I think right now. And we've got a big gathering in London next week all the traders and you know, producers and consumers are coming in for a week. I think you're going to get a lot of kind of talk around this as well. So i'd say after that, like you were really into Q two Armada, we really, the three of us, really look forward to seeing you there on an all Hydrocarbon week for Bloomberg. Our nice surveillance around the list. Is it it is done? Deal? Yeah? Absolutely?

You know you can't get a drink at the Oil week in London, unless it has an umbrella in it, it's just the same as comper week or whatever it's code. It's like copper week, but they're spread out alame week. You're gonna get to this quote from Morgan Stanley morning. So they cut their forecasts for crude for four q and twenty twenty four, so about ninety five dollars a barrel from one ten And this was the quote amirator from them. The new estimates reflect stronger demand but also

higher Russian supply. Now there might be some people who aren't in this commodity market who would turn around and say, well, Russian supply, why is that affected the market? What is that all about? Look, we've also raised our Russia supply numbers because Russia is being able to place more barrels than we had initially expected. Again par four kind of doing forecasts in an extremely uncertain world. That's absolutely fine. However, I go back to Chinese demand growing by a million

barrels per day an SPR. We do not have a million barrels per day of SPR hitting the market. That's a two million barrels per day swing. So even if we assume Russian production is flatier on her. I we don't lose any Russian production. We will lose somebody. Just assume we don't. It is still a much tighter market just from China and spr a loan. That's the crude call. I just got a message from a Bloomberg subscriber and

it just says, forget w Ti Nardi. Just wow. Yeah, can we talk about natural gas just briefly, I'm RACI. What's behind that move? Weather? I mean, like you said you needed a meteorogis in terms of we need weather forecasters. But look, Europe got very lucky, and of course in the US as well. Just how warm it's been Jan Feb. And even our March forecasts have again raised just the amount of natural gas we are backing out as a result.

We think natural gas prices will have to fall to about a dollar seventy five before you're actually kicking shot into the quest. So still a little bit more to go. But yeah, it has just been brutally warm. What a change a natural gas falling below two for the first time since twenty twenty, and I'm ratus looking for a further move lower and rata. This was great thank you. I'm going to send their energy aspects. Thank you for Americans. This is important because Alancia now is our new renaissance.

It's Stilantis and the leadership there is Carlos Tavarrus and as John Farroll grew up rooting for ac Milan and owning a Lancia Alanci Delka, this is the design and character that makes a pulse. Coach. Carlos Tavarus joins us now chief executive officer. It's Stilantis, and thank you so much to inviting us at BIRIN for the Formula one.

We really really appreciate it. I got to drive the forward conversation off of earnings and the good news of your company today, which is you're looking for a warm spot. In two twenty six you had a joint agreement with the Swiss. They're moving on to Audie Fine. And the great mystery in Formula one is what Carlos Tavarus is going to do to get into the new age of Formula one? Can you advance that story this morning? Sir? What have you learned in the cast last couple of

weeks what your ALFA Romeo team will do well? First of all, I would like to remind you that we have fourteen brands. Of course, all from MEO is very warm to our hearts, fantastic brand, equity, fantastic history. As you know, our more sports programs are focused on the twenty four hours off Loma right now with a hybrid technology and the Pussua brand, and also on the single seater electric races with the d S automobile and Mazzati is now a contender of the World EV single seaters

and that's where we are putting the focus. Fromeo will come later. FROMO will have a certainly a more sports program at one point in time, and we still have time to discuss this as we are still in from the one for for some time. And then we will invade the program or all from me. But it's too soon to unveil that and apologize for that. Okay, well we can do it later in the interview. Carlos help us here with how you bring the romance in your success of the since twenty fourteen. How do you bring

that over the EV. How do you bring Alpha Romeo and all you've done there over to electric vehicles. Well that's very simple, actually, you just have to drive the cars. If you drive the cars, if you experience the takeoff acceleration of an EV, if you experience the smooth ride and the improvement on the noise and vibration, if you experience the very low height of the center of gravity. To put it simply, an IV car is a better car.

So it's a better car. You can easily bring it to Alfromeal with the extended technology to ensure that the customer drive is even more exciting and pleasant. This is exactly what we are doing, is extended sportiness for the Alfromeal brand, with better acceleration, with better drive, with a suicer right. And by the way, this is exactly what

we do with the muscle American cars. With Dodge, we bring more muscle, we bring more burnouts and more donnets with the actually just about a car, right, Lisa, What's so good about this is you can drive down Central Park West and second gear and an EV Alpha and

the noise you can make with that it'll be just killer. Ye. Well, I'm not an expert in the fake noises that you can create in your silent evs, but I do want to talk about the RAM and Dodge brands because we're talking about the US, and we're talking a lot, just generally about margin pressure, and yet you recorded some of your biggest margins ever with the sale of these types of vehicles in the US, and I'm wondering how long that can last, given that they're starting to be some

pricing pressure on the margins. You are right to ask that question. In fact, first of all, we should just recognize that the employees of talent is starting in North America. I've done a stellar job in twenty twenty two basing

all the external headwinds that they had to face. Now to your question, in the near future, it's going to be an exciting period where everybody is going to try to hold on to a significant pricing power despite the rebalancing between supply and demand, which is of course ongoing and already there. So that's rebalancing on supply and demand

will put pressure on the pricing. But on the other side, because of the interest rates, we see some cooling in the economy that you will bring more cost reduction on some of the raw materials, eventually starting with steel, which means from one side, pricing power is going to be

under pressure. But you have the technology, you have the appeal of the products you have, the new models that are coming in and from the other side, you need to run fast in reducing the cost at a faster pace than the erosion of pricing power going to be the name of the game for the next year, and we are in the race. We are in that race, and I think that we'll see within one year who

is going to be the winner of that race. But that's exactly how things and fault in front of us for the next quarters account asses that main job counts. At this stage, the picture is about how do you absolve the cost of electrification. You see, you can see in many places of the world that the customer has not yet totally recognized that evs are a better car. And we see that when they are subsidies to erase

the cost of electrification, then the customers buy evs. As soon as you remove the subsidies, and you have this example in Germany, you have this example in Italy, then the consumers stop buying evs because they are not affordable enough. So the challenge for the industry in the next three to four years is to absolve the additional cost of electrification, to protect affordability and make sure that middle classes can buy pure revs at an affordable price, which means that

the transformation of the industry is just starting. In fact, we are live now transforming our company in a way that needs to be reasonably be deep because new technologies are in software platforms, many electric components, autonomous vehicles. All

of this costs a lot of money. And at the same time you need to bring affordability to the middle classes, which means that if we do not do our homeworks in terms of productivity, then in that case you will not be able to compete because some of the new entrants will show you that your cost competitiveness will not be enough. So do we need to make sure that we protect our companies by doing more cost competitive views.

I would say, of course yes. I would like to remind you that stendent is as a break even point, which is the benchmark of the industry. As our break even point is at forty percent of revenues. Forty get taken down the clock a little bit longer with a very long winded answer, So I can I ask it again with forty seconds left? Does that mean job cuts? It means that we are not excluding anything from the task of absorbing the cost of electrification. Okay, Carlos, thanks

for a time today. I just want to enjoyed that conversations. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday, starting at seven am Easter. I'm Bloomberg dot Com, the iHeartRadio app tune In, and the Bloomberg Business app. You can watch us live. I'm Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keane and this is Bloomberg. You go me to